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November 22, 2021

The Impact of Fees on Retirement Savings

In Episode 10 of the Financial Checkup, Dr. Paul Healey, cofounder of the Physician Financial Independence online community and a member of the Advantages Retirement Plan™ Investment Committee, shares his insights on the impact of fees on retirement savings over time.

OMA Insurance has partnered with Common Wealth, the administration and technology partner for the award-winning Advantages Retirement Plan™, to bring you The Financial Checkup, which features top financial questions and retirement stories from your fellow physicians.



Paul: The real problem is that the compound loss that you get from these fees, because not only do you lose say that $1,500 from that first year when you started investing, you also lose all the future growth on that 1500.

Speaker 2: Welcome to the Financial Checkup, a podcast series devoted to improving the financial health and retirement readiness of physicians and their spouses or common-law partners. This series is brought to you by the award-winning Advantages Retirement Plan from OMA insurance.

Alex: I'm Alex Mazer.

Jonathan: And I'm Jonathan Weisstub.

Alex: We're the co-founders of Common Wealth. A mission driven business that works with associations, unions, and employers to provide collective retirement plans, including the advantages of retirement plan for Ontario physicians.

Paul: My name is Dr. Paul Healey, and I'm an emergency physician, co-founder of the Physician Financial Independence online community with my wife, Dr. Jane Healey. I'm also a member of the investment committee for the Advantages Retirement Plan.

Jonathan: This series is for educational purposes and should not be considered investment, tax, financial or other professional advice.

Speaker 2: The views or opinions expressed by the presenters are solely their own and do not necessarily represent the views or opinions of the OMA, OMA insurance or the Advantages Retirement Plan.

Jonathan: I've heard you talk about the power in a way of fees relative to time.

Paul: Yeah, fees are a big thing and I would say that the problem with fees, there are a bunch of them. First of all, fees over the long term, erode the growth of your portfolio. And people say, "Well, it's really small. My financial advisor charges me 1.5%." That doesn't seem like a very big number, but that is actually a very big number. If you're only getting 6% a year and you're giving 1.5% of it away, then you are not going to get that growth. And when you look at the numbers over a 35 year career at the end, it's over a million dollars that you can have at the end of your career when you're ready to retire and stop working that you could have in your pocket, that's not in your financial advisor or your financial institution's pocket.

And a lot of this is because not only do you lose the simple cost of the fees so for example, if I have a $100,000 and I have a 1.5% fee, that's $1,500 that I would lose. And a lot of people say, especially when they're studying, well, that's not that much money, that seems fairly reasonable. But the problem is that as the amount of money gets bigger, if you then have a million dollars, all of a sudden you're now paying $15,000 a year in fees. And people can get... They can get their head around this idea of the simple cost of fees and what it costs every year. But the real problem is that the compound loss that you get from these fees, because not only do you lose say that $1,500 from that first year when you started investing, you also lose all the future growth on that 1500.

For example, if you're making, let's say just to keep the numbers simple, say you were making 10% a year, which you won't, that $1,500 that is now gone out of your account and is in your financial advisor's account, you would've made $150 the next year and every year after that so it's the compound growth on this money that you lose that is the real kicker with fees. And to use a medical analogy, we talk about absolute risk and relative risk in medicine so that's the whole idea of if we have a drug that reduces the rate of death by 1%, 1% doesn't seem like much, but when you multiply it by 10 million people, it's a large number. And so we really need to understand that this absolute number, these small percentages that are told by financial funds that we're told are insignificant, are incredibly significant, and it's what really going to affect the growth of your portfolio so you need to manage fees.

And physicians can be forgiven a little bit because prior to 2016, it was very hard for you to figure out how much you were paying fees, because quite frankly, the financial industry was simply hiding it from you and was making it very difficult for you to know. You would've had to go and find what's called the MER, the Management Expense Ratio on your investments, you would've had to go and do calculations. The nice thing today is that legislation has been brought in the CRM two rules which say that your financial institution has to provide you with a statement that tells you in dollar and a dollar value dollar figure, how much you are paying in fees so now you just have to make the effort to go and find it and figure out what you're paying.

And if you're paying 1.5% in fees, that is huge. And that is going to be a seven figure number that you don't have when you go to retire so that's why fees are so important, that's why keeping fees low is one of the best things that you can do to grow your portfolio and protect your savings.

Jonathan:  And an interesting number that I've heard you talk about is the translation of those fees into years worked.

Paul: Yeah. You can start to think about it, you take that number, let's say when you're ready to retire, you have a million dollars less than you would've had because you're with a high fee advisor, think about how long it takes you to make a million dollars, that's going to be, for a 65 year old physician, that's an extra three to five years, you're going to have to keep working to make that money so that's what I say to people.

People say, "Well, I really like my advisor and I just don't feel confident with this and I need to have this advisor." And I'll say, that's fine. And what I say to people is that you, it's up to you have to make that value judgment. If you feel that you're getting good value from your financial advisor, then you should go ahead, you should continue that way. But understand what that means, understand that may mean an extra three to five years that you're working for your financial advisor at the end of your career. And if you're okay with that, if you really need that security, go with it, that's fine, I'm glad that works for you. And I understand there are a significant number of people who feel they need a financial advisor who is looking things over and investing their money for them, but understand the cost to doing that.

Jonathan: And when you think about advisors and what they do, what is it that you think could ultimately make up for five additional years of...

Paul: Me personally, nothing. I have to be honest, personally, I'm interested in stuff, I like it, and I don't think that a financial advisor would offer me a lot of value and that would be a very expensive proposition for me to pay someone that much money. And I don't think for the average person that what a financial advisor is providing is worth the amount that they're paying. For the most part your financial advisor is, for your investments anyway, is going and is buying a pool of pre-made products, it's not like they're turning knobs and buying and selling stocks behind a desk to make money for you, they're buying a series of prepackaged investment options that you could buy yourself for significantly cheaper.

As far as the investment advice, as far as what to choose and where to put your money, I don't think they offer a lot of value. I think they can offer value with financial planning, with planning out for you, what your future's going to look like, how much you need to be saving to meet your savings goals, they're helpful in doing some general tax planning for when you're going to be removing money from your retirement savings, but as far as actually choosing investments and investing your money, they offer very little value.

Jonathan: In terms of asset allocation and rebalancing in a way that's thoughtful.

Paul: Yeah. But again, that has become automatic in this day and age. There are many products that will automatically rebalance for you, and you don't need a human being to do that, in fact, it can probably be better done in a more automated way. And there are lots of options that do that for example, OMA Advantages, they're using target date funds, which are an excellent product, which you can't easily get elsewhere in Canada, it's been very popular in the United States for a long time. If you are someone who's going to self-manage and you can buy ETFs, which automatically rebalance and do this automatically. There are a lot of products that easily replace that feature that financial advisors have previously touted or sold you as something very important that they do.

And unfortunately, that whole asset allocation part of it, is fairly easy to automate and sometimes I see financial advisors really pushing the idea that well, yes, but we really have an outlook that emerging markets are going to do well in the next decade so we're going to just adjust this knob a little bit, and we're going to put you in a slightly higher ratio of emerging markets and truthfully that's just knob twiddling and I think it's the illusion of work in order to take fees, because really that is of low value. Once you have a product that is diverse, that has appropriate ratio of equities and bonds, there's not a lot of knob twiddling that really needs to be done, you can automate it, which a number of products have done and you really don't need a financial advisor to do that.

Alex: Let's say you've got a physician that is looking for some kind of advice or planning advice, are there more affordable ways to access that advice? You gave the example before, if someone with a million dollar portfolio, 1.5% fee, that's $15,000 a year for advice, seems like a lot of money plus asset management. Are there more affordable ways for someone that actually does want some guidance in making some of these planning decisions?

Paul: Yeah, for sure. And just with your question too, I want to clarify that. I think most physicians will need financial advice. I just don't think they need it for their asset allocation and what investment to buy, but they are going to need it for financial planning. They're going to need to know how to draw their funds out. And yes, there is a more cost effective way to do that. A growing field are fee only financial planners. So financial planners, who you give them your information and much like your accountant and much like your lawyer, you pay them an hourly rate to look it over and create a plan for you. And so there's no reason to think that you should have to pay a percentage of your entire portfolio to get that service. That service can be acquired on an hourly basis the same way that you acquire any other service, the same way that people acquire your service, which is essentially an hourly rate.

I often say to physicians, "Hey, wouldn't it be great if we got the same deal as financial advisors?" The whole idea that, Hey, if I see a CEO in the emergency department who has fractured his wrist and I now fix his wrist and put it in a cast, can I now take a percentage of all the income he earns with that risk for the rest of his life? That would be a great deal, but no I get-

Jonathan: No one's taking you up on that offer.

Paul: No. And it would be nice if we had that offer, but no, we get paid a reasonable fee for the service we do. And the financial industry has to be the same way, you can get paid a reasonable fee for the service you provide, but you don't get to have a percentage of my entire net worth for decades for providing that service.

Alex: Are there questions that you would suggest physicians ask if they're, say they're speaking to different financial planners or advisors to kind of make sure they're doing their diligence about the kind of person that would have their interest in mind and do a good job for them?

Paul: Yeah. I think if you start asking a... First of all, you should never go into a meeting with a financial advisor, unless you know a little bit already, you should have read a couple of books and you should maybe explored our online group and have a sense of everything because if you go into that meeting, not even understanding the basic language, it's a lot like going onto a used car lot and dealing with a used car salesman who has a big information advantage over you so you really need to know a little bit. And I think the basics that everyone should know right now around... First of all, ask them what they think about index investing, ask them what they think about exchange traded funds. What are their thoughts about that. I've heard that people are doing a lot of low cost index investing, what's your opinion?

If you start getting very negative opinions, oh, that's a terrible idea. And no, they don't know what they're doing. And those people are going to lose a lot of money in the future. That's a bit of a red flag because these are evidence based concepts that have been demonstrated over and over, it would be like walking into a doctor's office and you ask them about vaccines and they immediately start saying, "Ah, vaccines are terrible." That's the level of evidence that we're dealing with here when it comes to index investing, buy and hold, these are important core concepts. And if they are obfuscating those concepts for their own purposes or trying to direct you to products that are high cost and don't meet those, then that should be a bit of a red flag.

The other thing I would say is if they're evasive on fees is ask the question exactly, how do you get paid for the service that you're providing me? And there shouldn't be any evasion on that question, they should very clearly say, "Well, the investments you buy, I get a percentage of what you give to our firm to invest. And this is the percentage you'll receive. This document says exactly what I'm getting paid every year." But unfortunately there's often a lot of evasion on this question, they're like, "Oh, you don't need to worry about that. I get paid by someone else, I'm just here to help you." So if they're evasive about fees, then you need to be concerned. Do your due diligence find out what you need to know and with the financial industry, be cautious because deception has been the rule.

Jonathan: Thanks for listening to the Financial Checkup.

Paul: If you're a Canadian physician, join the Physician Financial Independence group on Facebook to learn more about saving and investing.

Alex: For physicians in Ontario, check out the Advantages Retirement Plan at

Speaker 2: The financial checkup series is producing collaboration with OMA Insurance and Common Wealth, the administration and technology partner for the Advantages Retirement Plan.